How to Sell Edibles in California

The sale and regulation of cannabis-infused food products (a.k.a. edibles) is uncharted territory in the new landscape of recreational cannabis. The issues Colorado experienced with edibles in their first year of legalization—such as inconsistent THC servings, consumption by children and accidental consumption by adults—have caused other states to move forward with trepidation and tighter regulations. These issues have not gone unnoticed in California, where the state prepares to make the move to licensing recreational cannabis cultivators, manufacturers and retailers on January 1, 2018. If you are interested in breaking into the edibles market, you will need more than just a love of cooking and cannabis—you must follow regulatory compliance down to the letter.

“To start, you will need a Type 6 Manufacturer License with the state and your local government,” instructs Elkiya Menes, confectioner and founder of HumYum, an organic caramel company in Humboldt County, California. Making edibles means you are a Manufacturer 1 or 2, depending on what kind of cannabis product you’re using. Manufacturer 1 uses non-volatile substances (such as butter or CO2 oil), while Manufacturer 2 uses volatile substances (such as butane).

For the last year, Menes has been working towards fulfilling each step of the necessary compliance in order to get her line of cannabis-infused caramels onto retail shelves. We outline those steps for you here:

STEP 1: Set Up your Business Corporate Structure:

Will you be operating as a Sole Proprietor (S-Corp), Limited Liability Company (LLC), Corporation (C-Corp) or Nonprofit? This question is important with regards to your tax status and the protection of your personal assets. Most cannabis businesses immediately rule out a sole proprietorship as it does not provide legal separation between personal and business assets, which means you are personally responsible for actions on behalf of your business. If you get sued or go into debt, your personal assets are on the line.

Operating as an LLC is highly recommended as they are easy to form, tax efficient, and your personal assets are generally protected in the case of a law suit. Keep in mind, it is not an ironclad protection— LLCs are held personally liable for taxes, so your assets are vulnerable with regards to unpaid tax bills and the IRS.

The C Corp structure means your corporation is considered a separate business entity apart from its shareholders and owners, therefore, it is legally responsible for itself. This provides a separation between business and personal tax liability, which means double-taxation on both your business and personal income; however, it also means your personal assets can’t be seized as payment for debts the company owes.

Operation in California’s medical cannabis industry used to mean your business had to be a nonprofit. However, in 2015, Gov. Jerry Brown signed the passage of AB-266, which established that the medical cannabis industry would be allowed to be in the black.

In the end, how you choose to structure your business and tax status should be tailored to your unique situation, keeping in mind your financing and how averse you are to the possibility of being audited. If you want to learn how to best protect yourself, Menes recommends seeking the help of a lawyer or tax professional experienced in this area.

STEP 2: Set Up your Business Plan

Assuming you already know what your product will be, next you must figure out how you will manufacture it. Where will you process your edibles? How will you obtain your cannabis-infused oil, butter or tinctures? You will need to provide details of your property address/kitchen and a description of operations, including dosage, packaging, testing, inventory tracking and more.

Kitchen: The majority of states require you operate out of a commercially licensed kitchen. Local laws may require further authorization and inspection, so check your city’s website for regulations specific to your location.

You will have to supply building, site and floor plans, including dimensions, walls, partitions, entrances and exits. You will also have to fill out a form about water infrastructure (expected source and level of daily use) as well as a security plan.

Dosage: Low-dose servings (2mg of THC per caramel) have been implemented into HumYum’s business model, which Menes says, “even grandma can handle.” A maximum of 10mg of THC per serving is the limit according to California law, offering more control to the consumer, which is important as dosage and packaging have been the biggest issue with edibles. If your product is not low-dose, it must be delineated or scored into standardized servings of 10mg of THC.

Packaging: Packaging has moved to the forefront as one of the more important details of the edible industry. In 2014, a children’s hospital in Colorado reported that ninechildren had been brought in after accidentally ingesting edible cannabis. So, in order to increase child safety, packaging will need to be childproof, opaque and not come in any fashion that would “appeal to children.”

What does “appeal to children” mean? A study by the University of Washington showed that, while no single factor emerged as the most important, manufacturers should stay away from producing edibles that are brightly colored (red, orange, yellow, green), non-conventional candy shapes (such as teddy bears) and packaging that uses promotional characters like cartoons. It must also display a pre-written government warning in bold print.

As with most food products, the package will also need a manufacture date, name of origin, a list of all ingredients and a warning if nuts or other known allergens are used. You must also list the active pharmacological ingredients (THC and/or CBD content).

Cannabis Sourcing and Testing: As mentioned above, the type of cannabis ingredient you use will affect what kind of license you will need (Manufacturer 1 or 2). Menes comments that, as a manufacturer, buying wholesale is the most cost-effective method, even if it means you are now responsible for testing. All testing must be completed before reaching the retailer, and as a manufacturer, you take on that burden.

Inventory Tracking: Regulations also require “seed-to-sale” records for each edible item, which will be tracked using an RIFD or UPC code on your product. When scanned, the UPC code should be able to communicate the entire lifecycle of the edible—the serial number of the plant, where the cannabis was processed and where it was manufactured into an edible.

Step 3: Apply for Licensing

If you are able to obtain the proper licenses and capital, you will be ready to go. Hiring a lawyer could be a big help when navigating state and city regulations; alternatively, many cities have consulting agencies that can help you get organized, provide resources and help you figure out compliance. While consultations can set you back $300 to $500, this may end up saving you money in the long run. As far as start-up capital, Menes recommends a minimum of $15,000 to cover licensing applications and fees, commercial kitchen costs, childproof packaging, materials and testing.

The strict regulations of edibles are intended to protect the consumer and provide transparency to a previously unaccountable system. Gone are the days of the “pot brownie of unknown dosage” as cannabis and the culinary arts combine to offer consumers a vast selection of tasty—and measurable—cannabis treats.